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Final Regulations for Sec. 336(e) Elections Are Issued

On
Monday, the IRS issued final regulations on the rules that
apply when an election under Sec. 336(e) is made to treat the
sale, exchange, or distribution of at least 80% of the voting
power and value of a corporation’s stock (target) as a sale of
all its underlying assets, i.e., a qualified stock disposition
(T.D. 9619). In response to comments,
the IRS made a number of significant changes to the
regulations that were proposed in 2008 (REG-143544-04).

Sec. 336(e) was
enacted by the Tax Reform Act of 1986, P.L. 99-514, as part of
the repeal of the General Utilities doctrine. The
General Utilities doctrine grew out of General
Utilities & Operating Co. v. Helvering, 296 U.S. 200
(1935), a Supreme Court case permitting tax-free liquidations
to allow taxpayers to avoid potential multiple taxation of the
same economic gain. The Sec. 336(e) election is intended to
operate similarly to an election under Sec. 338(h)(10), except
it does not require an acquirer of target stock to be a
corporation or even necessarily a purchaser.

Also,
unlike Sec. 338(h)(10), which generally requires that a single
purchasing corporation acquire the stock of a target, Sec.
336(e) permits the aggregation of all stock of a target that
is sold, exchanged, and distributed by a seller to different
acquirers for purposes of determining whether there has been a
qualified stock disposition of a target.

The final
regulations, in perhaps the most major departure from the
proposed rules, permit the Sec. 336(e) election to be made for
S corporation targets, just as a Sec. 338(h)(10) election can
be made for S corporation targets.

The other primary
changes between the proposed regulations and the final rules
are:

The proposed regulations contained a rule
that disallows the recognition of losses resulting from the
deemed asset disposition to the extent the qualified stock
disposition consisted of one or more distributions of target
stock (disallowed loss rule). In response to comments, the
final rules have been modified to permit the target’s
realized losses in the deemed asset disposition to offset
the amount of the target’s realized gains.

Under the proposed regulations, the first type of
transaction for which a Sec. 336(e) election may be made is
a qualified stock disposition that does not consist of a
Sec. 355(d)(2) or (e)(2) transaction (provisions requiring
recognition of gain in certain corporate divisions).
However, in this case, the step in the basic model in which
the seller is deemed to purchase from the new target the new
target stock actually distributed might be combined with the
old target’s deemed sale of its assets to the new target
resulting in a Sec. 351 transaction with boot (generally
requiring gain recognition), which could lead to unintended
consequences. To solve this problem, the final regulations
modify the proposed regulations by providing that in a
distribution of target stock (and also for stock in a target
that a seller retains after the distribution date) the
seller is deemed to purchase the new target stock that is
distributed or retained not from the new target but from an
unrelated person in a taxable transactionThe seller will not
recognize any gain or loss on the deemed distribution of new
target stock, and the purchaser will have a fair market
value basis in the new target stock received without any
possible application of Sec. 351.

The final
regulations retain the rule that treats transactions
described in Sec. 355(d)(2) or (e)(2) as a sale to self. The
final regulations change the rule in the proposed regulation
that permitted the seller to make a unilateral Sec. 336(e)
election. Now, sellers, or in the case of an S corporation
target, all of the S corporation shareholders, must enter
into a written, binding agreement to make the election, and
an election statement must be attached to the relevant
return. The final rules retain the proposed regulation
election due date as the due date of the relevant tax
return, rejecting comments suggesting a later due date.

The final regulations are effective upon their
publication in the Federal Register, which is scheduled
for May 15.

The winner of The Tax Adviser’s 2014 Best Article Award is James M. Greenwell, CPA, MST, a senior tax specialist–partnerships with Phillips 66 in Bartlesville, Okla., for his article, “Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704(c) Allocations.”

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